Demand for new molds could improve moderately in 2020

Few industries in North America have suffered more than mold making as a result of China's emergence as a global manufacturing powerhouse since its admittance to the World Trade Organization in 2001. I have met many plastics professionals on both sides of the mold market who can regale you with stories of intellectual property theft, forced technology transfer, counterfeit products and more.

I do not believe it is an overstatement to say mold makers have been on the front lines of a trade war with China for nearly 20 years. And it may take another 20 years to understand fully all the damage to this sector — and this country — as a result of this war. So for many U.S. molders and mold makers, President Donald Trump's stand against China is long overdue.

But no matter how well-intentioned or justified a trade war might be, or how well it may eventually work out in the long term, it can be costly in the near term. That is the situation U.S. manufacturers, especially mold makers, are struggling with as we start the fourth quarter of 2019.

The U.S. manufacturing sector is currently in a period of modest contraction, and the recent uncertainty about the future trend in global trade is widely considered to be one of the reasons for the recent decline in U.S. manufacturing activity. And in case you missed it, that is the very definition of "irony."

There is no reliable, high-frequency source of data measuring activity levels for North American mold makers, but my own unscientific research indicates this industry has also been in a contraction phase for the past year or so. Demand for molds can be extremely volatile, but even moderate swings in the overall totals can represent huge hardships for some shops.

At the risk of sounding unrealistically optimistic, I will report some of the indicators I use to generate an outlook for the mold making sector are starting to look like they are at or very near a cyclical bottom. If this is the case, then demand for new molds could start to improve moderately in 2020. But there are other indicators that suggest the near-term risks to mold makers are still skewed to the downside. That's an economist's way of saying we may not have hit bottom yet.

I recognize these conflicting signals are causing the tension levels to rise rapidly among mold makers and most other buyers and sellers of capital equipment. This rising state of agita is exacerbated by the ramped up political rhetoric cranked out by a contentious presidential campaign season. But rather than get caught up in all the emotion, our best strategy is to identify and rationally explain both the positive and negative trends at the present time. We cannot eliminate future risks, but I am always hopeful we can develop strategies to manage it.

Mold makers constitute a very small segment of the capital equipment sector, and the trend in spending for capital equipment —often abbreviated as "capex" — has a significant impact on the trend in demand for new molds and tooling. Preliminary data indicates spending for capital equipment in the third quarter of 2019 was moderately positive when compared with a year ago, but the rate of growth was decelerating. So, what does this mean for 2020? Are we currently in a soft patch that will soon be over, or is this just the beginning of a prolonged downturn?

One of the indicators I use to forecast the future trend in capital spending in the United States is Morgan Stanley's Capex Plans Index. The Capex Plans Index is a three-month moving average of a manufacturing-weighted composite compiled from five monthly regional Federal Reserve Bank surveys measuring six-month capex plans, and it tends to lead growth in equipment investment by about three months. Read that definition a couple of times so you understand it — I did — or you can take my word for it that the trend in this index is a good leading indicator of investment in equipment.

According to the latest report, the Capex Plans Index declined modestly in September. The index has declined for most of the past two years after hitting a peak late in 2017, and this downtrend corroborates the gradual decrease during this period in the rate of change curve for investment in industrial equipment.

But the rate of decline in the Capex Plans Index is decelerating. This flattening of the downward slope typically occurs near the cyclical low-point. It is worth noting that three of the five Federal Reserve Districts that make up the overall index reported increases in the aggregate capex plans for their regions in September. These increases were mitigated by declines in two of the heavier-weighted districts, but this could still be an indication investment plans are stabilizing.

Based on the latest data, my current forecast is for a gain of 1-2 percent in investment in industrial equipment in 2019, followed by a similar gain of 1-2 percent in 2020. To some of you, this may well sound like I am unrealistically optimistic. But as the chart illustrates, not every downtrend in the growth rate turns into a major recession. The current downtrend is occurring at a time when interest rates are very low, employment levels are high and household incomes are rising. This means U.S. consumers should continue to spend, and this should keep the U.S. economy out of a recession for the foreseeable future.

If this is the case, then the short-term outlook for mold makers is favorable — not great, but not calamitous either. As for the long term, it has taken 20 years for the situation with China to come to a head. I do not believe it will be remedied quickly, but maybe we are finally heading in a better direction forward.